Q2 GDP growth unexpectedly revised up to nine-year high

By IBT Staff Reporter On 08/27/10 AT 9:26 AM

Britain's economy grew faster than originally thought in the second quarter of the year, with growth hitting a nine-year high, official data showed on Friday, but analysts doubt the pace of recovery can be sustained.

The Office for National Statistics said the economy grew by 1.2 percent in the three months to June, up from its preliminary estimate of 1.1 percent, after construction output proved stronger than first estimated. Analysts expected no revision.

On the year, the economy grew 1.7 percent in the second quarter -- 0.1 percentage points higher than the ONS's first estimate and economists' forecasts.

The UK grew 0.3 percent in the first three months of 2010.

The figures provide further evidence that Britain's economic recovery accelerated sharply during the first half of the year but economists are concerned that a weakening world economy and looming UK government spending cuts will sap growth in 2011.

Revised construction output figures were published earlier in the month and the ONS had said these could add 0.1 percentage points to GDP.

The second quarter is still likely to represent the high point of quarterly growth as fiscal tightening and a renewed slowdown in global activity constrains a more robust recovery, said Hetal Mehta, an economist for Daiwa Capital Markets.

The zero contribution from net trade is disappointing and questions how much the UK can rely on an export-led recovery.

Sterling was half a cent lower against the dollar after the figures because some traders had bet on an even bigger upward revision, but gilt futures were little moved as the data showed little to alter the outlook for monetary policy.

STRONG CONSUMPTION

The GDP data showed household expenditure rose 0.7 percent on the quarter and 1.0 percent on the year. That was the biggest quarterly rise since Q1 2008 and comes after a 0.1 percent fall in the first quarter.

A slowdown has not shown up in most of the third quarter data available so far, with recent reports showing retail sales rising strongly and factory orders rebounding although purchasing managers indexes for August slowed somewhat.

The overall conclusion is that we are not going to see this plunge in GDP growth in Q3 back close to zero as some people are saying, I think more likely something around half a percent, said Brian Hilliard, UK economist at Societe Generale.

Second quarter growth was also boosted by the fact that firms built up inventories for the first time since the third quarter of 2008.

However, growth in services output -- which account for more than two-thirds of the economy -- was revised down on the quarter to 0.7 percent from 0.9 percent.

That was largely down to a slump in air transport which the ONS said had been affected by the Icelandic ash cloud that blocked flights across northern Europe in April and May.

Government spending growth was also weaker in the second quarter at 0.3 percent compared with 1.5 percent in the first three months of the year, which was the strongest since the final quarter of 2008.

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